November 26, 2010 in Nation/World

Proposal targets Social Security taxes, payouts

Kevin G. Hall McClatchy
Calculating benefits

The sum you are entitled to at your full retirement is known as your primary insurance amount.

To calculate a PIA, the Social Security Administration looks at a person’s lifetime earnings, adjusted for overall wage growth. It uses the 35 best years of adjusted earnings.

Then, the SSA applies a formula that “replaces” different percentages of earnings. These brackets are designed so that the Social Security benefits of a lower earner replace more income, usually around half of past monthly earnings. Higher earners replace a lower percentage, closer to about 25 percent.

WASHINGTON – Social Security taxes would rise and benefits would fall under proposals from the co-chairmen of the special deficit-reduction panel that’s due to report to Congress by Wednesday.

The draft from the co-chairmen of the National Commission on Fiscal Responsibility and Reform would apply Social Security payroll taxes to much higher earnings than current law does. It would also create new higher benefits for poorer workers who’ve had low-wage careers.

“We’re solving Social Security for its own self, not for deficit reduction. And we had two goals: protect the truly disadvantaged and get (Social Security) solvency out to 75 years,” co-chairman Erskine Bowles told reporters on Nov. 19.

Their panel must issue its report by Wednesday. Nothing in it will become law unless Congress and President Barack Obama go along. Still, their proposals have ignited a vigorous debate.

Bowles was President Bill Clinton’s White House chief of staff and now is the president of the University of North Carolina system. He and his co-chairman, former Sen. Alan Simpson, R-Wyo., laid out their proposed deficit-reduction plan earlier this month. It called for painful tradeoffs as the best way to rein in rising debt.

None of their proposals command more public attention than those to change Social Security.

They say the ratio of their proposed Social Security benefit changes to revenue increases is 57 to 43 – meaning they’d cut spending more than they’d raise taxes.

Critics, including House Speaker Nancy Pelosi, D-Calif., say that today’s 20-year-old worker would see a 36 percent reduction in Social Security benefits compared with what today’s beneficiaries get, and want benefits to stay on schedule.

Bowles scoffed at the comparison.

“Scheduled is a joke. It’s scheduled, but it’s like my daddy said, ‘Don’t make promises you can’t keep.’ We can’t meet the schedule. In 2037, this thing runs out of money. All of the (Social Security) trust fund and interest earned in the trust fund is gone,” he said. “In 2037, benefits will be cut by 22 percent” unless changes are made before then.

The full-benefit retirement age will rise to 67 in 2037 under current law.

Bowles and Simpson propose to index Social Security’s retirement age to average U.S. longevity – the longer Americans live, the later they’d reach retirement age for full Social Security benefits. They anticipate a full retirement age of 68 in 2050 and 69 in 2075.

It also could inadvertently raise the system’s costs, according to the Government Accountability Office. In a Nov. 18 letter to Sen. Herb Kohl, D-Wis., chairman of the Senate Special Committee on Aging, the GAO said that raising the full retirement age could push more people into seeking disability insurance.

Bowles-Simpson would direct the Social Security Administration to provide for early retirement of workers in physically demanding jobs. This would have to be in place, with a dedicated source of funding, before the retirement age is raised.

Recognizing that people are living longer, the Bowles-Simpson plan also would allow retirees to collect half of their benefits early and the other half at a later age. Currently, if recipients collect benefits early, they get a smaller monthly payment for the rest of their lives.

Wealthier workers would see more of their income subjected to payroll taxes. By 2050, 90 percent of earned income would be subjected to the payroll tax under Bowles-Simpson. The formulas for monthly retirement benefits also would be rebalanced in a way that ultimately could lower benefits for all but the poorest future workers.

Today the government taxes only from the first $106,800 of annual earnings for Social Security. That’s scheduled to increase in 2020 to the first $160,000 of earnings. Under Bowles-Simpson, it would increase to the first $190,000 of earnings in 2020.

“We thought we’d spread the pain around in a progressive manner, but the good thing we did is we made Social Security solvent for the next 75 years,” Bowles said. “Could you do more on revenues and the benefits? Yes and no. But we tried to find the balance we were comfortable with and we think we’ve achieved that.”

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